MUTUAL FUNDS

There are two ways of investment:

1. Direct investment - the individuals invest on their own. 2. Indirect investment - the individuals give his/her money to some institutions.

The type of invest you chose depends upon three basic things:

1. Knowledge, 2. Information, and 3. Expertise of investing the money

History in Pakistan
In 1966 the government established the Investment Corporation of Pakistan (ICP).

Mutual fund was introduced in 1962 by the government.

In 90s there was a growing trend of launching new private mutual funds.

History in Pakistan

2001-2007 Tremendous growth

2008-2009 Declined to its lowest

2011-2012 Gained the required momentum

June 2011 Fund size Rs. 250 Billion

Feb 2012 Fund size

July 2011Feb 2012 44% increase in industry

Rs. 340 Billion

The mutual fund industry has the potential to grow further and provide the best opportunities for the investors.

25 Asset management Companies Offering different kinds of funds.

The Mutual Fund Association of Pakistan (MUFAP)

High ethical conduct

Transparency

Responsible for the growth of the mutual fund industry

MUTUAL FUNDS ASSOCIATION OF PAKISTAN

Licensed by the Government of Pakistan. It oversees the functions of mutual fund industry in Pakistan. All Asset Management Companies (AMCs) and Investment Advisory Boards ( IAs ), are licensed under the SECP regulations They are eligible to launch Mutual Funds and perform Investment Advisory Services. They are required to register as the members of MUFAP under the provisions of NBFC Rules 2008.

MUTUAL FUNDS
Pools the money of many investors and then invests them in different securities. Investments may be in: Stocks, Bonds, Money market instruments and Similar assets or A combination of these.

PORTFOLIO
The combined holdings, the mutual fund owns are known as its portfolio. A fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.

WHAT IS AN INVESTMENT PORTFOLIO?

An investment portfolio is a collection of investments all owned by the same individual or organization. These investments often include: Stocks which are investments in individual businesses; Bonds which are designed to earn interest; Mutual funds which are essentially a pool of money collected from many investors.

WHAT IS AN ASSET MANAGEMENT COMPANY?

Investment management firm that invests the pooled funds (mutual funds) of retail investors in securities in line with the stated investment objectives. It is a fact that the investment company provides more diversification, liquidity, and professional management consulting service than is normally available to individual investors.

WHAT IS AN ASSET MANAGEMENT COMPANY?

The diversification of portfolio is achieved by investing in such securities which are inversely correlated to each other. Companies collect money from investors through introducing various mutual fund schemes. In general, an investment company is engaged primarily in the business of investing in, and managing, a portfolio of securities.

TOP 8 ASSET MANAGEMENT COMPANIES

ABL Asset Management Al Meezan Investment Management Ltd Js Investments Lakson Investments NATIONAL BONDS CORPORATION UAE Emaan Financial Services HIRC (Pakistan Facilitator) National Fullerton Asset Management Ltd National Investment Trust Ltd PICIC Asset Management Company Ltd

Characteristics of Mutual Funds

1. Investors

purchase mutual fund shares from the fund itself instead of from other investors on a secondary market.
2. The

price that investors pay for mutual fund shares is the fund's per share net asset value (NAV) plus any shareholder fee that the fund imposes at the time of purchase (such as sales load).

Characteristics of Mutual Funds

3. Mutual fund

shares are

redeemable.
4. Mutual funds

generally offer new shares to accommodate new investors 5. The investment portfolios of mutual funds are generally managed by separate entities known as investment advisers or Asset management Company that are registered with the SECP.

TYPES OF MUTUAL FUNDS

Mutual Funds can be divided into two categories: 1. By structure 2. By objective

By Structure

Open ended

Closed ended

Open-ended Funds
These funds are in a continuous process of issuing shares/ units on demand and redeeming shares/ units on demand.

The shares/ units do not trade on a market The number of shares/ units outstanding varies each time the net asset valuation calculation is carried out, which is daily for most open-ended funds

Closed-ended Funds
Closed-end funds issue a specific number of shares.

Their capitalization is fixed

The shares are not redeemable, but are readily transferable and traded on either a stock exchange or the over-the-counter market.

The price of a closed-end fund share fluctuates based on investor supply and demand.
Closed-end funds are not required to redeem shares and have managed portfolios.

By Objective

Stock Funds Hybrid Funds Pension Funds

Islamic Funds

Money Market Funds

Specialty Funds

Stock (Equity) Funds

A mutual fund which invests primarily in stocks (shares).

Money Market Funds

Invests its assets only in the most liquid of money instruments. The portfolio seeks stability : by investing in very short-term, interest-bearing instruments issued by the state and local governments, banks, and large corporations. The money invested is a loan to these agencies The length of the loan might range from overnight to one week or, in some cases, as long as 90 days. They are considered the equivalent of cash.

Hybrid Funds
Mutual fund that invests in stocks and bonds. A hybrid fund offers investors the opportunity to diversify their portfolio with a single investment vehicle. The ratio of stocks and bonds may remain fixed or vary over time.

Pension Funds
A fund established by an employer to pay retirement benefits to employees. Pension Funds are major institutional investors.

Islamic Funds
The investment made in different instruments is to be in line with the Islamic Shariah Rules.
The Fund is generally to be governed by an Islamic Shariah Board. There is a purification process that needs to be followed, as some of the money lying in reserve may gain interest, which is not desirable in case of Islamic investments

Specialty Funds
A mutual fund investing primarily in the securities of a particular industry, sector, type of security or geographic region.
Because of the lack of diversification, specialized or specialty funds are higher risk but potentially higher reward than most other types of mutual funds.

SNAPSHOT OF MUTUAL FUND SCHEMES

Mutual Fund Type

Objective

Risk

Investment Portfolio

Who should invest

Investment horizon

Money Market

Liquidity + Moderate Income + Reservation of Capital

Negligible

Treasury Bills, Those who park their Certificate of funds in current accounts Deposits, Commercial or short-term bank Papers, Call Money deposits

2 days - 3 weeks

Short-term Funds (Floating - shortterm)

Liquidity + Moderate Income

Call Money, Commercial Papers, Treasury Bills, CDs, Little Interest Rate Short-term Government securities.
Predominantly Debentures, Credit Risk & Government Interest Rate Risk securities, Corporate Bonds Interest Rate Risk Government securities

Those with surplus short-term funds

3 weeks 3 months

Bond Funds (Floating - Longterm)

Regular Income

Salaried & conservative investors

More than 9 - 12 months

Gilt Funds

Security & Income Long-term Capital Appreciation

Salaried & conservative investors Aggressive investors with long term outlook

1 year and more

Equity Funds

High Risk

Stocks

> 5 years

Index Funds

To generate returns that are commensurate NAV varies with Portfolio indices like index performance BSE, NIFTY etc with returns of respective indices Capital Market Risk and Interest Rate Risk Balanced ratio of equity and debt funds to ensure higher returns at

Aggressive investors

> 5 years

Hybrid Funds (e.g. balanced funds and MIPs)

Growth & Regular Income

Moderate & Aggressive

> 1-2 years

INVESTMENT PROCESS IN MUTUAL FUNDS

HOW TO BUY AND SELL SHARES:

All mutual funds Other mutual You can purchase will redeem (buy fund shares are shares in some back) your shares sold mainly mutual funds by on any business through brokers, contacting the day and must banks, financial fund manager send you the planners, or directly. payment within insurance agents. seven days.

Determination of Share Value

When you buy share: You pay the current NAV per share plus any fee the fund assesses at the time of purchase, such as a purchase sales load or other type of purchase fee.

Determination of Share Value

When you sell share: The fund will pay you the NAV minus any fee the fund assesses at the time of redemption, such as a deferred (or back-end) sales load or redemption fee. A fund's NAV goes up or down daily as its holdings change in value.

Net Asset Value

The net asset value is calculated by subtracting the Fund liabilities from the total assets. Net Asset Value = Total Assets Liabilities / no. of shares outstanding

HOW FUNDS CAN EARN MONEY FOR YOU

Dividend Payments
A fund may earn income in the form of dividends and interest on the securities in its portfolio. The fund then pays its shareholders nearly all of the income (minus disclosed expenses) it has earned in the form of dividends.

Capital Gains Distributions

The price of the securities a fund owns may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds distribute these capital gains (minus any capital losses) to investors.

Increased NAV
If the market value of a fund's portfolio increases after deduction of expenses and liabilities, then the value (NAV) of the fund and its shares increases. The higher NAV reflects the higher value of your investment.

FACTORS TO CONSIDER WHILE INVESTING IN MUTUAL FUNDS

DEGREES OF RISK

All funds carry some level of risk. You may lose some or all of the money you invest your principal because the securities held by a fund go up and down in value. Dividend or interest payments may also fluctuate as market conditions change.

FEES AND EXPENSES

Running a mutual fund involves costs including: shareholder transaction costs, investment advisory fees, and marketing and distribution expenses. Funds pass along these costs to investors by imposing fees and expenses.

FEES AND EXPENSES

Some funds impose "shareholder fees" directly on investors whenever they buy or sell shares. In addition, every fund has regular, recurring, fundwide "operating expenses." Funds typically pay their operating expenses out of fund assets which means that investors indirectly pay these costs.

TAX IMPLICATIONS OF DIFFERENT TYPES OF MUTUAL FUNDS

There are two forms of distribution:

1. Income Dividends 2. Capital Gains Both forms of distribution are subject to federal income tax and often state and local taxes. Except if the distributions were received in a taxdeferred account, or if the income dividend distributions are from municipal money market funds and municipal bond funds

ADVANTAGES OF MUTUAL FUNDS

 Professional Management - - Professional money managers research, select, and monitor the performance of the securities the fund purchases. Diversification - - Spreading your investments across a wide range of companies and industry sectors can help lower your risk if a company or sector fails. Affordability - - Some mutual funds accommodate investors who don't have a lot of money to invest by setting relatively low amounts for initial purchases

 Liquidity & Flexibility - - Mutual fund invertors can

readily redeem their share at the current NAV. You

can systematically invest or withdraw funds according to your needs and convenience. Easy Entry And Exit

Transparency - - One get regular information on the value of the investment, the proportion invested in each class of assets and the fund manager's investment strategy and outlook. Well Regulated - - The operations of Mutual Funds are regularly monitored by SECP.

DISADVANTAGES OF MUTUAL FUNDS

1. Costs Despite Negative Returns -- Investors must pay sales charges, annual fees, and other expenses regardless of how the fund performs.
Investors may also have to pay taxes on any capital gains distribution they receive even if the fund went on to perform poorly after they bought shares. 2. Lack Of Control - - Investors typically cannot determine the exact make-up of a fund's portfolio at any given time. nor can they directly influence which securities the fund manager buys and sells or the timing of those trades.

3. Price Uncertainty - - , the price at which shares are purchased or redeemed will typically depend on the fund's NAV.